Entrepreneurship

Who are entrepreneurs?#

Finally, there is the category of entrepreneurs. Entrepreneurs range from one-person developer educator businesses and solo “indie hackers” to bootstrapped or indie startups and full-on venture-backed startups. As someone who can code, you can create something of great, scalable value with your bare hands, and that is a mighty power indeed.

Why not start a startup?#

Most startups fail#

It’s well understood that most startups fail. Bad ideas exist. You might find a gap in the market, but there may be no market in that gap. You know that you are supposed to make something people want, but the problem is that people often don’t know what they want until they see it. You can’t even ask them.

As David Ogilvy once observed:

“The problem with market research is that people don’t think how they feel, they don’t say what they think, and they don’t do what they say.”

You don’t get rich#

Even for those that do succeed, there are long, lean years of nothing while you build a business. Gail Goodman famously called it the Long, Slow Ramp of Death. Your opportunity cost— what you might otherwise earn instead as a senior developer if you didn’t try to be a founder— is extremely high, possibly in the millions.

This is one of many reasons why not to start a startup (Here is a longer list, with Paul Graham’s responses.). In fact, it is often said that you should not start a startup to get rich; you should do it because you feel compelled to create something that should exist but doesn’t. If you are right, getting rich is a side effect.

How can we avoid risks?#

There are smart ways you can de-risk this, for example, by leaving your current company with a deal that they will become your first customer. Otherwise, if you get really desperate, you can sell politically themed cereal to fund your startup.

Entrepreneurship is a full-time job#

As a developer, you must acknowledge that your bias will be to try to code your way out of any problem because that is what you are good at and enjoy doing. However, this avoids the hard parts of talking to the customer: finding out what they want (product management), getting in front of them (marketing), and convincing them to buy (sales).

You cannot escape that entrepreneurship consists of the worst of everything we have discussed in this chapter. Your full-time job becomes people management, product management, and marketing, on top of which you still have to code. However, the upsides are accordingly greater.

Major forks in entrepreneurship#

There are some major forks in the road when it comes to entrepreneurship. The right answer is usually somewhere between two extremes.

Product or engineering-driven#

Either work out what people want and then figure out a way to make it or figure out what you can make and work out how to make people want it.

Venture capital vs. bootstrapped#

Some people are absolutists about what kind of entrepreneurship they pursue: either VC is evil, and they will bootstrap no matter what, or life is short, and they want to go for broke. This seems unwise. Match your funding structure to your opportunity. For example, if you see a land-grab, winner-takes-most opportunity with network effects, take VC (or venture debt) to get there; if not, bootstrap it. Either way, the more profitable you can be per new user, the better the economics will be for you on any deal you make.

If you belong to an underrepresented minority, don’t forget that there are diverse funds like Backstage Capital and Astia Global that defy Silicon Valley’s pattern matching biases.

Lastly, note that there are also newer hybrid models like Indie.vc and Earnest Capital that blend characteristics of VC and bootstrapping.

B2B vs. B2C#

Whether you sell to businesses or you sell to consumers can make a huge difference in your economics. Businesses can afford higher prices and can have comparatively lower churn (~1%). However, there are fewer of them, and it can cost more to reach them. Consumers are plenty and easy to reach via performance marketing and social media. Unfortunately, they are very price-sensitive, and 5 to 10% monthly churn is not uncommon.

The term “B2B2C” is often used for marketplaces, platforms, and aggregators. In recent years, the developer tools market has been gaining steam and dedicated investment because of the realization that developers can be marketed to consumers but can spend like businesses.

Self service vs. enterprise#

B2B customers like to buy in different ways. The traditional way of selling software, from the days of IBM, Oracle, and Salesforce, is “top-down.” This means hiring very expensive salespeople in expensive suits to get into the right meetings with the CTO/CEO, then rolling it out across the company after the sale was already made.

Atlassian “bottom-up” sales strategy#

The recent history of software startups has completely reversed this. For example, Atlassian (makers of JIRA) is notable for bootstrapping for thirteen years before IPO using purely “bottom-up” sales, offering cheap, self-service price plans that individual users could put on their own credit cards without blinking.

This doesn’t mean that they eschew selling to the enterprise completely. In fact, the C-suite meeting can be a far easier sale when you can say, “half of your employees already pay out of pocket to use our product, here are dashboards and extra features you can get if you sign right here.”

Enterprise customers#

It’s possible to take “bottom-up” too far; there are great security and compliance reasons to extensively vet any vendor. From the founder side of things, enterprise money is usually far stickier (less churn) and higher margin (more profit). The good news is that “enterprise features” are relatively standard–– everybody wants single sign-on, on-premises software, audit logs, team management, SLAs, and so on–– so much so that checklists and even entire startups have been made to help you with this.

Products vs. services#

In the context of a software startup, products mean writing one set of software that all customers use, and services mean writing custom software tailored to the needs of each individual customer.

Scalability#

Products are more scalable because every feature added is immediately useful to all customers (including future ones), while services are more sellable because you are directly addressing the needs of each user. A lot of people get caught up in the idea that products are better than services because they want to do things that scale (and a pure services business is basically a consulting shop that refuses to admit it).

However, in the early days, you may want to start with products first. Oddly enough, this is the one thing that both VC’s and Indie Hackers agree on. In the Indie community, this is widely known as the stair step or ladder approach. Then, you can start getting into Productized Services. The VC/YC community calls this do things that don’t scale. In short, you can offer “service as a service” before you make “software as a service.”

Revenue#

Performing services gets revenue in the door earlier while making sure you are hyper attuned to customer needs. Instead of being off in your own world-building product nobody wants, you can build your product internally to serve your needs and then eventually let the “services facade” fade away, so users can use your product directly. This can take a long time and will never quite go away:]. Chetan Puttagunta, a notable software startup investor, notes that at $60 million in revenue, half the revenue of software startups are services, but even at $800 million, services revenue is still at 20%. You could frame this as a product core, services shell.

You can build a “one stop shop” solution for one specific type of customer or one solution for many different types of customers that “does one thing well.” It’s often easier to start with the former because the customer focus feels easier to develop for, but you risk building a crappy version of many things that already exist.

Still, Joel Spolsky argues that:

“Vertical software is much easier to pull off and make money with, and it’s a good choice for your first startup.”

You can be enormously successful doing either. Probably the one thing everyone agrees on is to not try to do both in the early days.

📝 Note: For more on this and other aspects of software business models, head to Intro to Tech Strategy.

The best advice on starting up comes from the Indiehackers community and podcast. For developers, there’s no need to go anywhere else.